Texas Governor Rick Perry unveiled his Cut, Balance, and Grow tax plan yesterday. Perry’s plan is a flat tax, similar to the one made popular by Steve Forbes in 1996 and 2000. Like the Forbes plan, Perry’s flat tax is optional, which means you can either file under the new tax system or the old one. While some critics have said the optional language makes the proposal less bold, providing taxpayers an alternative plan may be the only way to realistically introduce major tax reform in America.
Here are a few details about the Perry tax plan:
• Institute Individual Flat Income Tax Rate of 20%
o Allow Individuals to Choose Existing Tax Code or Simple Flat Tax System
o Preserve Deductions for Mortgage Interest, Charity, and State/Local Taxes
o Include Standard Exemption for Individuals/Dependents of $12,500
o Standard Exemptions and Other Deductions are Phased Out for Filers with Annual Incomes Above $500,000
• Eliminate Tax on Social Security Benefits
• Eliminate Tax on Dividends and Capital Gains
• Eliminate Death Tax
• No Federal Sales Tax or Value-Added Tax
• Reduce Corporate Income Tax Rate to 20% to Enhance American Competitiveness
o Eliminate Corporate Loopholes and Special-Interest Tax Breaks
o Transition to a Territorial Tax System
o Allow Locked-Up Overseas Capital to be Brought Back to the U.S. at a Reduced Tax Rate of 5.25%
By allowing taxpayers to keep popular mortgage interest and charitable deductions the plan may be easier to sell. Twelve years ago when I worked on Steve Forbes’ campaign, the number one criticism I heard was that it would take away these two deductions. However, keeping these deductions came at a price. Instead of having a rate of 17 percent like Forbes’ proposed, Perry’s rate sits at 20 percent. Complicating matters is that Newt Gingrich is proposing a 15 percent optional flat tax.
Another big difference between the flat tax that Perry has proposed and the Gingrich plan is that Newt’s plan is truly flat, while people who earn more than $500,000 lose charitable and other deductions under the Perry flat tax. While the $500,000 threshold in Perry’s plan may seem reasonable it could also curb philanthropy since it takes away a major incentive for wealthy Americans to donate to a wide verity of causes.
As we all have come to know, the top ten percent of wage earners pay 70 percent of the taxes in America. Those same people also donate a lot of money to charity, and Perry’s plan as proposed could make it more difficult for universities and hospitals to receive large gifts. As Iowans, we can see the power of these large donations in our own communities. There is the Holden Comprehensive Cancer Center and the Pomerantz Family Pavilion located at the University of Iowa Hospitals and Clinics. Every hospital in Iowa benefits from major donations.
Those are large examples, but look at our own communities. I lived in Brooklyn, Iowa for eight years. The little town of 1,400 had a wonderful public library and community center made possible by generous donations from people who may have been affected by Perry’s salary cap.
As a conservative, I would rather encourage private donations to build libraries, community centers, and expansions at hospitals because the alternative is that the government will fund these projects, which will impact all of our taxes. I don’t want to get too down on Perry’s flat tax. I think it is a sound proposal, but eliminating deductions at a certain point may end up being counterproductive.
Politically, Perry’s flat tax proposal may help him turn his campaign around. For the first time in his campaign Perry is driving the debate and forcing people to respond to what he is proposing. That is a big departure from having to defend his ten years as Texas governor.
It also helps that Perry’s plan has the blessing of Steve Forbes. Contrast that with Herman Cain’s economic advisors who nobody really knew. Perry can now take his plan on the campaign trail where it should sell well with voters since it maintains many of the deductions taxpayers rely on. Selling the plan maybe the most important part of his plan. We all saw how Herman Cain struggled to defend his 9-9-9 plan. If Perry is up to the task, he can reverse the current trend of his campaign.
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